Magazine article Risk Management

What Threats Loom for D&O?

Magazine article Risk Management

What Threats Loom for D&O?

Article excerpt

There was the countdown, the dropping of the ball in Times Square, all the trappings of a traditional new year. But there was also around-the-globe television coverage. After all, this wasn't just any new year. It was the dawning of 2000, the new millennium.

For underwriters of directors' and officers' coverage, as well as risk managers, it was a vital and potentially disastrous turning point. For years it was known that historical computer software had to be rewritten or replaced with compliant systems. Since executive management had years to deal with the problem, it was arguable that any post-new year glitches and financial losses would be fully or partially the result of mismanagement. Doomsayers had projected billions of dollars in potential damages, and the consequent D&O exposure. Underwriters did not want to provide coverage; insureds argued coverage was already provided within existing programs; all held their collective breath.

In reality, the big moment ended up being a nonevent, as Y2K fizzled like cheap champagne. But after the hype and predictions (A hardening of the market at last!) where is the D&O market? Although year 2000 concerns created some firmness at the end of a buyers' market decade, will it remain? Or will the market revert to its softer ways?

The simplest answer to these questions: probably, no. The various market forces will continue to neutralize each other, but an analysis of these factors provides insight into the new millennium D&O market and what may come.

Market Capacity

Market capacity remains high. In fact, the industry has grown such that it is no longer identified by just primary and excess insurers, but also specialty categories, such as financial services, health care, high tech, education, not-for-profit, power generation, international and private ownership. Within each of these, multiple insurers--calculated by one industry database at ninety D&O providers--compete for your business. Joining major D&O players Chubb Executive Risk and AIG are companies like Kemper and The Hartford. Ace and XL-Capital also recently established direct U.S. underwriting facilities. And Gulf, CNA and Lloyd's continue to offer their underwriting expertise, alongside primary, excess and industry-specific providers.

Another component of market capacity is reinsurance, a sector incurring losses and foreseeing continued loss trends. As one insurer predicts, "Some reinsurers are going to get toasted."

Insurers seeking reinsurance for specialty categories, such as health care and high tech, have and will continue to see significantly higher costs that are being passed along in premium quotations. But, overall and especially for the major insurers-that are less dependent on reinsurance, the cost of reinsurance has not changed either market pricing or capacity.

The end result is clear. Market competition remains high and any attempt to increase prices will likely be met with new insurers or expansion by existing insurers.

Underwriting Issues

So, if market capacity remains high, and competition remains intense, what are the underwriting issues that will determine individual pricing and future trends?

Although loss trends may not be spurring any changes just yet, they remain the single biggest problem for almost every insurer.

The main culprit in these trends are securities class actions. Despite the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA), the number of securities class actions remains high. Further, PSLRA has increased the procedural costs and prosecuting time of these claims. Final judgments and settlement amounts have also grown.

The Cendant Corporation's December 1999 proposed $2.8 billion shareholder settlement is a potentially telling event. (The case is a result of a one-day, 45 percent drop in stock price two years ago, after an accounting fraud scandal was revealed. …

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